Banking Soundness and Monetary Policy


Charles Enoch, and J. Green
Published Date:
September 1997
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Mr. Iltchev noted that in Bulgaria, in a number of cases, the initial capital for formation of new private banks was raised through credits advanced by large state banks to entrepreneurs. This process had been ultimately unhealthy for the banking sector because some of the newly established banks had engaged in significant connected lending. He asked whether the Czech Republic had experienced the same phenomenon, and if not, how the initial capital for the newly formed private banks had been raised. Mr. Tošovský responded that the explosion of applications for bank licenses in the Czech Republic had caused the authorities to raise the minimum capital requirement from less than $2 million in 1990 to $17 million now. A number of companies and municipalities had pooled their funds to raise the necessary capital, and individuals with small deposits had become minority shareholders. Only in a few cases was capital raised on borrowed money from other banks. In these cases, shareholders obtained credit from their own banks to repay their loans, which resulted in a significant increase in insider lending. By the time the problems became apparent, it was already too late. The Central Bank, however, had placed large penalties on the banks not observing insider lending restrictions and, in some cases, had replaced the management.

Mr. Iltchev asked about the relationship between the Central Bank and the courts in the Czech Republic. He noted that in Bulgaria the courts had been second guessing the decisions of the central bank. In fact, as of that date, none of the banks that the central bank had declared insolvent was closed. Mr. Tošovský answered that nine banks were closed in the first half of 1995 with the cooperation of the courts. However, several prior steps had been taken. First, amendments to the Banking Act had increased the central bank’s powers in changing the capital of a bank in cases where reserves were not adequate to cover the size of the nonperforming loans. Second, the central bank had engaged in intensive communication with judges to quicken the process of liquidation. Third, the central bank had organized seminars to provide technical assistance to judges and prosecutors. This was the result of a problem with one small bank. Judges, in that case, had blocked the bank’s clearing system account. Had this been done in case of a large bank, the results would have been disastrous for the payment system as a whole.

In response to a question regarding the structure of ownership of the four largest commercial banks, Mr. Tošovský noted that the government, through the National Property Fund (NPF), maintained 33–45 percent of these banks’ shares, while the rest of the shares were disbursed to the public through the voucher privatization program. As a result of the restructuring process, these banks were now owned by large investment funds, companies, individual shareholders, and foreign investors. The Government had decided to fully privatize one bank; this project will be finalized in the next six months. The Government was seeking foreign partners for privatizing this bank to avoid raising capital from domestic banks, and also to avoid problems of nontransparency.

In response to a question regarding hyperinflation in Argentina, Mr. Pou stated that hyperinflation was politically a favorable event in the sense that, finally, people understood that it was important to provide political support to more prudent approaches to monetary matters. In Argentina, hyperinflation had significantly reduced the role of both the financial system and the capital markets. The financial sector was reduced from 40 percent of GDP in 1940 to only 5 percent by the early 1990s because of a shift in financial assets abroad. Given the return of confidence, people would likely be willing to trust the domestic financial system and bring the funds back to the country. Hyperinflation had been the best way to end the 40-year of inflation in Argentina by ultimately enforcing a rigid convertibility system.

Mr. Marino asked about the regulatory framework in Croatia. Mr. Škreb replied that, when the National Bank was granted the function of issuing licences in the early 1990s, there had been only a couple of banks functioning in Croatia. To change this oligopolistic environment and reduce the spread between lending and deposit rates, the Government had decided to increase the presence of foreign banks. However, no clear targets were set regarding the number of banks that would be sought. One proposed measure was to increase the minimum equity capital to prevent the prolification of unhealthy banks. In fact, Slovenia increased the minimum capital for banks with a full international license to $30 million, despite complaints by some foreign banks regarding low levels of return and the underdeveloped financial markets.

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